Request for Comments on Proposed NASD Rule of Fair Practice Regarding Outside Business Activities
TO: All NASD Members and Other Interested Persons
LAST DATE FOR COMMENT: FEBRUARY 14, 1988.
EXECUTIVE SUMMARY
The NASD requests comments on a proposed NASD Rule of Fair Practice that would require all persons associated with a member firm to provide prior written notice to the firm of certain outside business activities.
The NASD Board of Governors believes the proposed rule is necessary to inform member firms of the nature and extent of the outside activities of their principals, associated persons, and employees so the firms can more effectively carry out the supervisory responsibilities mandated by the NASD Rules of Fair Practice and the federal securities laws.
The text of the proposed rule is attached.
BACKGROUND
The growing diversification of the financial services industry has provided increased business opportunities for persons associated with member firms, both within the scope of their employment and otherwise. The NASD Board of Governors has noted that in recent disciplinary cases, prior notice to a member firm of an associated person's outside business activities could have prevented the firm's entanglement in legal difficulties and harm to the investing public. The Board concluded that it is imperative that member firms receive prior notification of all outside business activities of their associated persons so that the member's objections, if any, to such activities may be raised at a meaningful time and so that appropriate supervision may be exercised as necessary under applicable law.
The internal rules of many member firms already include limitations on outside business activities and notification requirements. In addition, both the New York Stock Exchange and the American Stock Exchange require associated persons of member firms to notify their firms of outside business activities.1/
The proposed NASD Rule of Fair Practice would not distinguish between supervisors and other associated persons and would impose an obligation upon principals, associated persons, and employees to notify their member firms prior to engaging in outside business activities. The NASD Board of Governors believes that the adoption of the proposed rule would serve to protect investors and the public interest by involving member firms in the prior review of all business activities of their associated persons.
PROPOSED RULE
The proposed rule would prohibit any person associated with a member firm from being employed by, or accepting compensation from, any other person for any outside business activity unless the individual has provided his employer firm with advance written notice. The rule also would apply to business activities that are outside the scope of an associated person's relationship with the employer firm.
* * * *
The NASD encourages all members and other interested persons to comment on the proposed rule. Comments should be directed to:
Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506
Comments must be received no later than February 14, 1988. Comments received by this date will be considered by the NASD National Business Conduct Committee and the NASD Board of Governors. If the proposed rule is approved by the Board, it will be submitted to the membership for a vote. If approved by the membership, the rule must be filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice can be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.
Sincerely,
Frank J. Wilson
Executive Vice President and General Counsel
Attachment
PROPOSED NASD RULE OF FAIR PRACTICE
Outside Business Activities
Sec. __. No person associated with a member shall be employed by, or accept compensation from, any other person pursuant to any business activity outside the scope of his relationship with his employer firm unless he has provided written advance notice to that firm.
1/ New York Stock Exchange Rule 346(b), (e), and Supplementary Material .10; American Stock Exchange Rule 342(a), (b), and Commentary .20. Both organizations also require persons in supervisory positions to devote their entire time during business hours to the business of their firms and allow such persons to obtain permission from the exchange to devote less than full time to the business of their firm when it will not impair the protection of investors or the public interest.